Berlin remains one of the world’s most interesting and attractive real estate markets – especially when it comes to the city’s apartment building market, which is leagues ahead of other major cities in Germany. “The market for apartment buildings in the German capital”, explains Jürgen Michael Schick, owner of MICHAEL SCHICK IMMOBILIEN GmbH & Co. KG and President of the IVD Real Estate Association, “is far and away the largest market of its kind in Germany, a fact confirmed by the IVD’s recent Residential Investment Market Report. Having analysed data from official property and land valuation committees in Germany’s 50 largest cities, the IVD concluded that apartment building transactions totalled EUR 15.932 billion in 2016. The Berlin market was responsible for EUR 4.2 billion of the total, giving Berlin a 26 percent share of the entire German market”.
Source: IVD Residential Investment Market Report 2016/2017
Berlin’s apartment buildings have a long tradition. The earliest apartment buildings were built before 1900. Even back then, they were a popular investment asset for the wealthy middle classes. And nothing has really changed. “Apartment buildings have two main advantages”, explains Schick. “Firstly, multifamily housing continues to generate secure income streams in the form of stable or growing rental income. Secondly, the value of apartment buildings has increased consistently over the long-term. Still, they need to be at sustainable locations in stable neighbourhoods if they are to deliver the optimum returns. An apartment building’s size, structural quality and occupancy rate are also key factors. As long as any investment decision duly evaluates all of these parameters, apartment buildings can deliver on their potentials as safe investments and generate continuous value growth."
Given their many advantages, it is only natural that apartment buildings are one of the major asset classes on the German real estate market. This is demonstrated by the uninterrupted growth in transactions in the segment, which has been underway since 2009. In 2016, the volume of transactions on the German apartment building market increased by around four percent. An analysis of sales data from 47 German cities reveals that the volume of transactions rose by 87.23 percent between 2009 and 2016 as the market grew by EUR 7.42 billion.
However, the supply of these mixed-use buildings, which often combine residential and commercial units, can no longer keep pace with rising demand from investors, especially as it has been further strengthened by the extended period of historically low interest rates. Against this background, the number of apartment building transactions has declined. At the same time, the prices buyers are paying have, in many cases, risen sharply. The latest IVD Residential Investment Market Report has collected data on Germany’s entire stock of apartment buildings: “According to the Federal Statistical Office, the number of residential buildings has risen by three percent in the last five years, from 18.23 million to 18.73 million. The number of multifamily apartment buildings rose from 3.04 million to 3.15 million in the same period, which also corresponds to an increase of around three percent”.
Since 2009, total sales of multifamily apartment buildings in Germany have been rising steadily. Germany’s largest cities remain the most important apartment building markets – just three cities (Berlin, Hamburg and Cologne) account for more than half of the total transaction volume.
At the same time, the status quo between the largest cities and their small and medium-sized counterparts has started to shift. “While transaction volumes usually correlate with the size of a city’s population and its housing stock”, explains real estate entrepreneur and IVD President Schick, “the following trend was observed last year: Investors are increasingly active in Germany’s small and medium-sized cities – attracted by their stable economies and high standards of living. Alongside Germany’s major metropolises, there are a number of fast-growing cities, or ‘swarm’ cities, offering increasingly exciting investment opportunities. Viewing developments from a Berlin perspective, cities in Central Germany are certainly an interesting proposition. We have been supporting a growing number of investors in their acquisition of attractive investment assets in Dresden, Leipzig, Magdeburg, Halle and Erfurt”, adds Schick.
The fact that the market is evolving is clearly demonstrated by strong purchase price growth in Class B and C locations. Of course, Munich still boasts the highest average purchase price. But a ranking of the top five purchase prices also includes two Class B cities – Potsdam and Dresden. Potsdam actually ranks second, ahead of its much bigger neighbour, Berlin. As a result of the dwindling supply of apartment buildings in Berlin, more and more investors are discovering the attractions of Potsdam, the capital of Brandenburg, which lies just outside Berlin.
Berlin continues to register more apartment building transactions than any other city in Germany – 1,155 mixed-use, residential and commercial buildings changed hands in the city in 2016. All in all, 11,464 apartment buildings were sold in Germany in 2016. With 611 properties sold, Cologne ranked second behind Berlin, followed by Leipzig (594), Essen (495), Wuppertal (493) and Hamburg (438). However, the number of apartment buildings sold in Berlin in 2016 is by no means a record. In fact, the number has steadily declined over the last few years. In 2013, there were 1,790 deals involving apartment buildings, while 1,863 apartment building transactions were registered in Berlin in 2011.
Rental apartment buildings hold a 47 percent share of the market for developed land in Berlin. In comparison with other German cities, this is an extremely high figure. Based on the total volume of transactions involving apartment buildings, Hamburg is Germany’s second-ranked city at EUR 1.5 billion, followed by Munich (EUR 0.98 billion), Dresden (EUR 0.95 billion) and Cologne (EUR 0.77 billion). The current average price for an apartment building in Berlin is EUR 3.64 million (down 1.36 percent from EUR 3.69 million in 2015). Based on average purchase prices, apartment buildings are significantly more expensive in Potsdam (EUR 4.34 million) and Munich (EUR 6.2 million).
Source: IVD Residential Investment Market Report 2016/2017
Berlin’s decentralised nature means that individual neighbourhoods can have very different profiles. As a result, an equally wide range of investment opportunities have emerged in the city’s urban districts. Prices have not only risen rapidly in central districts, such as Mitte or Charlottenburg-Wilmersdorf, they have also surged in many other districts. Over the past few years, the highest price growth in percentage terms was registered in the ‘emerging’ districts of Neukölln, Lichtenberg, Wedding and Tiergarten. A number of micro-locations outside the city’s commuter rail ring also continue to offer comparatively affordable prices.
It is still safe to assume that Berlin’s apartment buildings will continue to offer attractive returns, whatever general movements the market makes. Low interest rates, a lack of serious investment alternatives, the city’s continuous population growth, increasing housing shortages and relatively low prices per square metre mean that Berlin’s multifamily apartment buildings will continue to be among the most sought-after investment assets on the national and international capital markets for many years to come.
The apartment building segment holds a strong market position, benefitting from both Berlin’s status as Germany’s capital and the city’s appeal as an attractive, international metropolis. Berlin’s positive image continues to exert a strong magnetic effect, drawing millions of visitors each year, including a large number of investors who have a keen sense of where to invest, and where to avoid. Their instincts tell them that Berlin still has a great deal to offer, both today and in the future – and especially on the apartment building investment market.
What is an investment apartment building?
Investment apartment buildings are, essentially, rental apartment buildings. They contain a number of individual housing units that are rented out on long-term tenancy agreements. Investment income is generated in the form of monthly rental income. As an asset class, the investment apartment building segment not only includes classic apartment buildings built during Germany’s economic upswing at the end of the 19th century, but also newer buildings in which apartments are rented out.
How are the returns from investment apartment buildings calculated?
If you want to compare alternative investments in rental apartment buildings, the best place to start is by comparing gross yields. The gross yield is an expression of a building’s rental income as a proportion of its purchase price. Simply divide the annual net rent (gross profit) by the purchase price. The resulting yield, expressed as a percentage, can also easily be compared with the gross returns from other investments.
Are their major differences between newly developed and existing apartment buildings?
The differences between newbuilds and existing buildings should never be underestimated. Older buildings typically need more maintenance, which requires significant expenditure. Normally, owners should be ready to budget EUR 12.50-16.50/m²/year. Maintenance costs are usually much lower for newly developed residential and commercial buildings. Moreover, new buildings are developed to higher standards than old buildings, especially in terms of accessibility and energy efficiency. Given their future viability, an ever growing number of investors have decided to increase their investments in newly developed apartment buildings. MICHAEL SCHICK IMMOBILIEN GmbH & Co. KG is not only a specialist in brokering transactions for existing apartment buildings in Berlin, we also specialise in the market for turnkey property developments, or forward deals.
Why are so many international investors interested in apartment buildings in Berlin?
Compared to residential property prices in London, Paris and many of Europe’s other major cities, Berlin is a very affordable and attractive metropolis. The City on the Spree also benefits from its population’s growing purchasing power and from Germany’s track record of political stability. However, in view of uncertain alternatives, many property owners are currently reluctant to sell their apartment buildings.
When will Berlin’s real estate boom run out of steam?
Investors and industry experts have been arguing over this question for some time now. in many of Berlin’s districts, demand for housing and apartment buildings is currently far higher than supply. As a result, both property prices and rents have been rising rapidly. The city’s appeal remains undiminished, but the seriously attractive yields achieved with apartment buildings over the past few years are now a thing of the past. In some districts, purchase prices have actually doubled. “In other major cities in Germany, rents for newly developed housing are already stagnating. Purchase prices for globally marketed developments also seem to have peaked. Berlin is often credited with benefitting from a long-lasting catch-up effect. For owners of apartment buildings, however, now would probably be a good time to think about making a well-timed sale and realising the profits from the outstanding growth in value their properties have enjoyed. Commercial and private owners should both be evaluating their properties to see if they can make a lucrative exit. They should also seek expert advice from real estate professionals who specialise in this area”, explains IVD President Jürgen Michael Schick.